JEDDAH, 7 April 2008 — Saudi Arabia’s economy has been growing rapidly in recent years because of rising oil prices and booming public and private investment. With a nominal GDP projected at around $465 billion (SR1.74 trillion) this year, the Kingdom’s economy is now on a par with that of Switzerland and accounts for a little more than half of the total output of the Gulf Cooperation Council (GCC) and is twice the size of the second largest GCC economy, the UAE.
The nominal GDP, which was $309.9 billion in 2005, is expected to grow to $517.3 billion in 2009.
Global oil prices are expected to remain high, investment in domestic oil and gas production capacity is being ramped up, and the enormous potential of the private sector is being unleashed by fundamental improvements to the business environment. As a result, robust public and private sector investment should underpin real economic growth of 6 percent or more annually over the coming years, the Riyadh-based Samba Financial Group said in its latest report “The Saudi Economy: Recent Performance and Prospects for 2008-09.”
The real GDP was 6.1 percent in 2005 and fell to 4.3 percent in 2006 and 3.7 percent in 2007. GDP growth is expected to gather pace this year, reaching 6.7 percent in real terms.
The surge in Saudi oil revenue will support further brisk growth in government spending. Much of this will be directed toward basic infrastructure, but spending on salaries and other benefits, as well as subsidies, will also be raised in a bid to offset the social costs of rising inflation.
The report said despite the economic stimulus coming from rising government spending, the expanding private non-oil sector is increasingly becoming the driver of growth.
Inspired by properly sequenced and thorough-going economic reforms, both private and foreign investment are surging ahead, most notably in utilities, manufacturing, telecoms, financial services, and the new economic cities. With economic reform momentum likely to be maintained, the prospects for sustained private investment growth are excellent.
The growth in government spending will continue to lag that in oil revenue, keeping the budget in surplus territory by as much as 20 percent of GDP both this year and next. The balance of payments position is also exceptionally strong and current account surpluses averaging some 25 percent of GDP in 2008-09 will further boost foreign asset holdings.
Howard Handy, Samba general manager and chief economist, said in the report that the major risk to this buoyant outlook stems from inflation, with consumer price growth likely to average around 8 percent this year. Barring any change of policy, the outlook for prices depends largely on the pace of housing delivery, the course of global commodity prices and the value of the US dollar. These conditions may gradually improve in the second half of this year and into 2009, helping to dampen some import prices and subdue wage pressures.
Inflation has picked up markedly in the past two years, a phenomenon that is new to Saudi Arabia. The Samba report said economic policy challenges have been heightened by the pickup in inflation, which reached 8.7 percent in February.
Having been negative in the first five years of the decade, average consumer price inflation accelerated to 2.3 percent in 2006, and further to 4 percent in 2007. In contrast with previous oil booms, Saudi Arabia has been more measured in raising spending, thereby creating room to pay down domestic debt and build up foreign assets.
This strategy has given the government greater fiscal flexibility and a substantial resource base to maintain spending in the face of potential future shocks, including a decline in oil prices.
The oil sector will remain the central contributor to GDP. Samba expects oil production to edge up this year to average around 9.25 million barrels per day, 6.3 percent more than 2007. With investment in oil and gas capacity continuing to expand at a rapid pace, the contribution from the hydrocarbons sector is expected to rise by 7 percent.
Saudi Arabia’s balance of payments outlook is robust. Merchandise import demand will also remain strong this year, growing by some 22 percent to just over $100 billion. Because of big increase in oil earnings, the Kingdom’s trade surplus is expected to reach record 44 percent of GDP this year. With oil price growth softening somewhat in 2009, the surplus will ease to about 40 percent of GDP, the report said.
